Pay and incentives

  • Can lab experiments help design personnel policies?

    Employers can use laboratory experiments to structure payment policies and incentive schemes

    Marie Claire Villeval, November 2016
    Can a company attract a different type of employee by changing its compensation scheme? Is it sufficient to pay more to increase employees’ motivation? Should a firm provide evaluation feedback to employees based on their absolute or their relative performance? Laboratory experiments can help address these questions by identifying the causal impact of variations in personnel policy on employees’ productivity and mobility. Although they are collected in an artificial environment, the qualitative external validity of findings from the lab is now well recognized.
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  • Are workers motivated by the greater good?

    Workers care about employers’ social causes, but the public sector does not attract particularly motivated employees

    Mirco Tonin, March 2015
    Employees show more commitment to an employer that promotes the greater good, and they work harder too. Moreover, many people are willing to give up some of their compensation to contribute to a social cause. Being able to attract a motivated workforce would be particularly important for the public sector, but this goal remains elusive. Indeed, there is evidence for the public sector that paying people more or underlining the career opportunities (as opposed to the social aspects) associated with public sector jobs is instrumental in attracting a more productive workforce, without having a negative impact on intrinsic motivation.
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  • Can firms oversee more workers with fewer managers?

    Firms need to tailor their allocation of talent and responsibility, and their managerial structure, to fit their competitive situation

    Valerie Smeets, February 2017
    Managers are supervising more and more workers, and firms are getting flatter. However, not all firms have been keen on increasing the number of subordinates that their bosses manage (referred to as the “span of control” in human resource management), contending that there are limits to leveraging managerial ability. The diversity of firms’ organizational structure suggests that no universal rule can be applied. Identifying the factors behind the choice of firms’ internal organization is crucial and will help firms properly design their hierarchy and efficiently allocate scarce managerial resources within the organization.
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  • The pros and cons of workplace tournaments

    Tournaments can outperform other compensation schemes such as piece-rate and fixed wage contracts

    Roman M. Sheremeta, October 2016
    Tournaments are commonly used in the workplace to determine promotion, assign bonuses, and motivate personal development. Tournament-based contracts can be very effective in eliciting high effort, often outperforming other compensation contracts, but they can also have negative consequences for both managers and workers. The benefits and disadvantages of workplace tournaments have been identified in an explosion of theoretical, empirical, and experimental research over the past 30 years. Based on these findings, suggestions and guidelines can be provided for when it might be beneficial to use tournaments in the workplace.
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  • Bosses matter: The effects of managers on workers’ performance

    What evidence exists on whether bad bosses damage workers’ performance, or good bosses enhance it?

    Kathryn L. Shaw, January 2019
    A good boss can have a substantial positive effect on the productivity of a typical worker. While much has been written about the peer effects of working with good peers, the effects of working with good bosses appear much more substantial. A good boss can enhance the performance of their employees and can lower the quit rate. This may also be relevant in situations where it is challenging to employ incentive pay structures, such as when quality is difficult to observe. As such, firms should invest sufficiently in the hiring of good bosses with skills that are appropriate to their role.
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  • Do post-prison job opportunities reduce recidivism?

    Increasing the availability of high-quality job opportunities can reduce recidivism among released prisoners

    Kevin Schnepel, November 2017
    The majority of individuals released from prison face limited employment opportunities and do not successfully reintegrate into society. The inability to find stable work is often cited as a key determinant of failed re-entry (or “recidivism”). However, empirical evidence that demonstrates a causal impact of job opportunities on recidivism is sparse. In fact, several randomized evaluations of employment-focused programs find increases in employment but little impact on recidivism. Recent evidence points to wages and job quality as important determinants of recidivism among former prisoners.
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  • Efficiency wages: Variants and implications

    Wages affect productivity and non-wage costs; this carries important labor market and policy implications

    Ekkehart Schlicht, July 2016
    Higher wages increase labor costs but also improve the productivity of the labor force in several ways. If firms take this into account and set their wages accordingly, the resulting wages could fail to adjust demand and supply but may induce phenomena like over-education, discrimination, regional wage differentials, and a tendency for larger firms to pay higher wages. All these phenomena are quantitatively important and well-established empirically. Efficiency wage theory provides an integrated theoretical explanation rather than a sundry list of reasons, and offers an efficiency argument for progressive income taxation.
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  • Skill utilization at work: Opportunity and motivation

    Challenging jobs and work incentives induce workers to use their skills but make life difficult for managers

    Giovanni Russo, December 2017
    Organizational characteristics and management styles vary dramatically both across and within sectors, which leads to huge variation in job design and complexity. Complex jobs pose a challenge for management and workers; an incentive structure aimed at unlocking workers’ potential can effectively address this challenge. However, the heterogeneity of job complexity and the inherent difficulty in devising a correct set of incentives may result in misalignment between job demands and incentivized behaviors, and in complaints by employers about the lack of skilled workers.
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  • Are happy workers more productive?

    Firms’ concerns about the well-being of their employees are largely supported by the evidence

    Eugenio Proto, December 2016
    Recently, large companies like Google have made substantial investments in the well-being of their workers. While evidence shows that better performing companies have happier employees, there has been much less research on whether happy employees contribute to better company performance. Finding causal relations between employee well-being and company performance is important for firms to justify spending corporate resources to provide a happier work environment for their employees. While correlational and laboratory studies do find a positive relationship, the evidence remains sparse.
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  • Production spillovers: Are they valued?

    Spillovers can contribute to team success, although workers are not compensated for them

    Joseph Price, August 2017
    Workers can contribute to total firm production directly through their own output or indirectly through their influence on the output of co-workers. Workers with positive productivity spillover effects cause individuals around them to perform better and increase overall team production. In contrast to the “peer effects” literature, workers with positive productivity spillovers may not be the workers with the highest levels of personal output. Such productivity spillovers are important for team success even though they play only a minor role in determining worker pay.
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